A Safe Bet

Financing options for Tristate start-ups have been slim since the economic bubble burst in the late 1990s. But activity in non-traditional lending is heating up.

According to David Willbrand, a Thompson Hine attorney who specializes in representing emerging companies and venture capital funds, venture capitalists are starting to open their purse strings again. The environment for both investors and emerging companies is "much more bullish than it has been for some time," he observes.

Entrepreneurs and small businesses have several options for obtaining financing. Traditional choices include banks (which generally require personal guarantees), or making use of personal funds and assets, home equity loans, credit cards, and borrowing from friends and family. Non-traditional options include venture capital funds and "angel" investors.

Venture funds are institutions or partnerships that raise and pool money to invest in emerging businesses. These funds tend to invest early in companies with high growth potential. Angel investors usually are individuals with high net worth, and can include family members, friends and people with specific industry knowledge or insight. Angel investors come in at an earlier stage and prove seed capital. Both venture capital and angel investors seek a higher risk/reward ratio than banks will chance. And they tend to favor product-based companies.

Venture funds and angel investors typically look for returns after three to seven years. Ultimately they hope to "scale" the emerging company"”help it grow output or sales while operating costs stabilize or even decline per-unit. Then they want to see the business sold at a very high multiple of their initial investment. Service-based startups such as restaurants don't fill that bill because they are typically longer-term investments with greater labor costs, and therefore are more difficult to "scale."

These days, Tristate investors are spending more time and energy on life sciences, such as medical devices and pharmaceuticals. "We have an increasing amount of activity in pharmacology companies. I think we are racing very hard to try to close the gap that currently exists between Cincinnati and some other communities," Willbrand remarks. He points out that the infrastructure is already here to support this growth. "When you look at University of Cincinnati, when you look at Children's Hospital, when you look at some of the venture firms that have particular expertise in this area," Cincinnati is poised to leverage and take advantage of that market, he predicts.

Other areas of growth in the Tristate can be found in the service sector, including an increase in the number of home-based businesses. For these start-ups, traditional funding sources may provide a more flexible option. Banks typically do not favor product over service-based companies and are committed to a longer-term relationship. Growth, although an important part of a company's prospects, is less important than cash flow and whether or not the business is able to support the debt request.

Credit cards and home equity loans are a simple way to raise money, but "if you are really going to use the funds for a business venture, we don't suggest you go that way," says Don Stock, Vice President of Business Banking at PNC Bank. "What we would like to do is try to keep the business and the personal assets separate." PNC Bank offers an unsecured product called the Choice Credit Line. With a cap at $100,000 and a personal guarantee, small-business owners approved for this line of credit usually can access funds within days.

For business loans above $100,000, some collateral is required. If the deal cannot be done conventionally or "if using assets and cash flow of the business doesn't make sense for some reason, then we automatically send it to our SBA [Small Business Administration] department to have them look at the deal," Stock says. With "preferred lender" status, PNC streamlined the process and dramatically decreased the wait time, increasing approval rates and the volume of deals completed for clients.

National City Bank, another SBA preferred lender, also offers a full range of traditional products to help the entrepreneur get started. "Typically, a brand new business has access to money through the SBA," according to Rick Rokosz, senior vice president and market executive for NCB's Small Business Banking. Once financing is in place, banks are also poised to provide services to help manage the funds"”either through a product like the Small Business Sweep Account (a checking account and money market hybrid), or points/reward programs, both offered by NCB.

In addition to providing capital to Tristate entrepreneurs, National City is focusing on a growing segment of small businesses owned by women. According to Rokosz, "There are over 10 million women business owners in the country right now and they generate $3.5 trillion in annual sales." Nationally, National City has set up a fund of $3.5 billion to be loaned out over the next 5 years to female business owners.